What to Look Out For When Analysts Lean Bullish

Plus, outperforming sectors in which analysts are bearish

Senior Quantitative Analyst
Feb 16, 2022 at 8:23 AM
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A few weeks ago, we looked at a sentiment survey from the American Association of Individual Investors (AAII) showing a lot more of their members were bearish on the market than bullish. Analysts tracked by Zacks Investment Research, on the other hand, are putting "buy" recommendations on more and more stocks.

The data from Zacks shows the number of analysts that recommend a buy, sell or hold rating for a stock. The percentage of recommendations that are a 'buy' have been spiking since the start of the pandemic. Now, more than 65% of the ratings are a buy, which is far above the prior peaks over the past 15 years. In the analysis below, I’m breaking down these numbers to get a better sense of what analysts are so bullish on.

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Analysts Preferring Small Caps 

The chart below compares large cap stocks to small cap stocks. The black line is a ratio of the S&P 500 Index (SPX), as a large-cap index, to the iShares Russell 200 (IWM) , which is an ETF that tracks the small-cap Russell 2000 Index (RUT). When the line is increasing, as it is now, it means large-cap stocks are outperforming small-cap stocks. Analysts, however, are showing more of a liking toward small caps. For small caps, the percentage of buys is at its highest level on the chart and above 65%. For stocks in the S&P 500 Index (SPX), the percentage of buy recommendations is falling and just went below 60%. Despite the outperformance of large caps recently, analysts are recommending fewer now than compared to six months ago while recommendations on small-caps are at a high.

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Analyst Buys Per Sector

We have stocks broken down into about 45 sectors. The table below shows the sectors that analysts became more bullish on over the past 12 months. These are the sectors driving the increase in percent buys. It’s interesting that the stocks in the top three sectors performed relatively poorly. The increase in bullishness for the oil, gas and coal sector is understandable as those stocks have great returns over the past 12 months.

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When analysts and market prices are going in opposite directions, I expect the analysts to be wrong more times than not. When they’re proven wrong and forced to capitulate, it fuels more action in the direction of the market prices. Thus, I found stocks from those top three sectors which were down the most over the past year have more buys now than a year ago. The first one on the list is Spotify (SPOT). Despite it being cut in half over the past year, the percentage of analysts with a buy recommendation for the company went from 44% to 72%. The increased bullishness seems unjustified, giving me a list of stocks that could fall further should overdue bear notes come down the pike.

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Next, here are sectors where analysts have become more bearish. Again, I’m going to focus on the sectors where prices are going in the opposite direction of the analysts as that’s where the opportunities lie. Specifically, I’m going to look into the life insurance sector, the water & utilities, and the general industrials, as these three sectors have more bearish analysts though the stocks in those sectors have gained an average of at least 10%.

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Below are the stocks from those three sectors mentioned above (life insurance, gas & utilities, and general industrials) -- up double-digits yet analysts are more bearish on them now than a year ago. I don’t expect the analysts to be wiser than the markets so I would consider adding these stocks to a bullish stalking list.

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